UAW Will Cash In on GM Stock Dilution

Earlier this month, General Motors made a $4 billion cash contribution to its UAW pension fund. Reports state that an additional $2 billion worth of GM common stock will be contributed to the fund. What is not being reported is where the stock is coming from.

In addition to public ownership since the IPO, GM common shares are currently held by the US Treasury, Canadian Government, the UAW and Motors Liquidation Company (creditors of Old GM). Unless the US Treasury is giving away taxpayer shares, new shares will have to be issued for an additional $2 billion worth of common shares to fund UAW pension plans.

Any new stock issuance is dilutive to existing shareholders and lowers the value of GM stock. Considering that US UAW benefit plans are still under-funded by $17 billion (as mentioned in reports) and overseas obligations under-funded by $10 billion (not mentioned in reports), it is logical to infer that more dilution to existing stock will occur in the future. General Motors is making a public relations pitch that they are striving to become "debt" free. Analysts and investors should interpret this to mean that future capital raising will come in the form of secondary offerings for common or preferred stock.

Another certainty is that future capital raising will be to the benefit of the UAW and a detriment to GM investors. Considering how Old GM shareholders and bondholders were sacrificed to benefit the politically powerful UAW, it should come as no surprise to New GM shareholders that their financial well-being will be subordinated to benefit the UAW. Also, UAW President Bob King has made it clear that he expects additional rewards from GM's return to profitability.

It remains to be seen how much General Motors' profit potential is held hostage by the UAW. Labor contract negotiations and outcomes will be closely watched in 2011. Interested parties should also be aware that GM misrepresented that the UAW has a "no-strike" clause with the company. No written, binding document has ever been produced to substantiate that claim. This is just another example of GM not being perfectly honest with the facts, a habit that should be an even greater concern to investors.